Posted by: Josh Lehner | May 18, 2022

Oregon Economic and Revenue Forecast, June 2022

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

The economy continues to boom. Jobs, income, spending, and production are all rising quickly. However, pessimism about the expansion is growing. First quarter GDP was negative. Inflation is at multi-decade highs, eroding household budgets. Russia’s invasion of Ukraine created an oil shock and raised fears of increased conflict. A new round of pandemic-related shutdowns in China is set to exacerbate global supply chain struggles.

And yet, the U.S. economy is expected to push through. This peak in pessimism based on temporary issues will fade. Consumer spending and business investment have accelerated in recent quarters. Jobs and income will continue to grow. Inflation is set to slow due to the combination of higher interest rates, cooling of goods prices, and moderating household financial conditions. It remains an open question just how much inflation will slow.

The ultimate risk is the economy needs higher interest rates to truly wring inflation out of the system. Should that be the case, the risk of a boom/bust cycle increases. Recessions are in part psychological events, driven by what John Maynard Keynes called “animal spirits.” If firms and households believe there will be a recession and start pulling back on spending and investment, it can create a self-fulfilling event.

Regardless, it is clear the economy has moved into a new phase of the cycle. The dynamics are shifting. No longer is the U.S. or Oregon in recovery mode, but in net expansion territory. The challenges, risks, and trends associated with a mid-cycle expansion are different than those faced during the initial recovery.

The 2022 personal income tax filing season has been shocking. Despite a record kicker credit being claimed, payments rose sharply. Given last year was a very strong year, today’s growth stands out even further.

The surge in tax collections was not unique to Oregon, with all states that depend upon income taxes seeing collections outstrip projections. Across states, high-income tax filers have accounted for much of the growth in personal income tax revenues. A wide range of investment and business income sources are booming. However, as is usually the case, Oregon’s revenue gains during the boom were relatively pronounced. Tax season payments will come in more than $1.2 billion (70%) larger than last year. The typical state has seen around half this rate of growth.

While economic growth remains strong, the large gains in reported taxable income have more to do with taxpayer behavior than they do the underlying economy. Investment and business income are not always realized for tax purposes at the same time as they are earned in the market. Late 2021 was a great time to cash in assets, with equity prices and business valuations high, and potential federal tax increases on the horizon. As a result, income reported on tax returns grew at more than double the rate of economic measures of income.

Given that revenue growth has been driven by nonwage sources of income, most of the recent surge in payments will likely prove to be temporary. After so much income was pulled into tax years 2020 and 2021, less will be realized in the near term. This taxpayer behavior also puts Oregon’s revenues at risk of the sharp declines experienced after asset market corrections in 2001 and 2007. With recessionary risks rising, profits and gains could soon turn into losses, and a smaller share of filers could be subject to the top rate.

The bottom line is that the unexpected revenue growth seen this year has left us with unprecedented balances this biennium, followed by a record kicker in 2023-25. The projected personal kicker is $3.0 billion, which will be credited to taxpayers when they file their returns in Spring 2024. The projected corporate kicker is $931 million, and will be retained for educational spending. Even so, if balances are not spent, net resources for the 2023-25 biennium will have increased by $427 million relative to the March 2022 forecast.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

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Posted by: Josh Lehner | May 12, 2022

The Economy Could Use Better Productivity

With a structurally tight labor market making it challenging to find workers, and higher wages potentially making it cost prohibitive to hire them if you can find them, what are firms to do? The productive capacity of the economy is the combination of capital and labor it takes to make goods and services. If labor proves more challenging, firms can increase their capital and investment.

Higher productivity would solve multiple economic issues at the same time. It would increase production, alleviating some supply constraints in the economy. It would allow businesses to better afford higher wages and keep unit labor costs lower as a result. Both would be disinflationary relative to the current environment.

To date, productivity in the economy is not much higher than its pre-pandemic trend. Productivity increased initially, in part because firms were forced to make do. Sales were strong but the workforce was smaller. However, as employment has increased in the past year, per worker productivity has largely moved sideways, eroding some of those initial gains. Productivity in the first quarter of this year declined, although the data is noisy and omicron disrupted workplaces to a greater degree.

Moving forward, productivity remains a key, long-run economic measure. Higher productivity would raise the speed limit of overall economic growth, and better keep inflation at bay. There are two potential bright spots that could point toward faster productivity in the years ahead.

One, new orders for capital goods remain strong. Businesses are looking to investment in new equipment. This should make workers more productive. However, the massive increases in new orders, measured in dollars, do not look as strong on an inflation-adjusted basis. The good news is even inflation-adjusted new orders remain above pre-pandemic levels. This is at least in part due to strong sales and manufacturing production overall, but could lead to better productivity moving forward.

Two, new business formation remains strong. New firms are usually best able to bring new products, services, and efficiencies to the market. Should this new generation of businesses do likewise, productivity could improve in the years ahead, even as the creative destruction process results in a few more business closures along the way. To date the number of businesses in Oregon is higher than it was pre-pandemic. Closures are up, particularly in hard-hit industries like leisure and hospitality, but new firms are beginning to take their place.

For more on start-ups in Oregon see here, and for more on the types of capital and productivity in Oregon see our office’s previous work.

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Posted by: Josh Lehner | May 4, 2022

Cyclical Labor Shortage is Gone, Structural Remains

Labor market dynamics are shifting. Job growth will be more balanced across industries. Job gains will moderate in a full employment economy, slowing aggregate wages along the way, which should help lessen some inflationary pressures as well. However, a structural labor shortage remains given the strength in the underlying economy and firms struggling to fill positions due to pandemic-related changes.

Let’s start with the good news. Today, we are no longer talking about cyclical labor supply issues related to the recession, the pandemic, lack of in-person schooling, enhanced unemployment insurance benefits, or anything like that. Those are all in the rearview mirror. Labor supply has rebounded considerably in the past year, over which time Oregon added more than 100,000 jobs. The U.S. has added more than 6 million jobs over the same time period. Folks are not just sitting on the sidelines waiting to return; they have already returned. The share of the prime working-age population that has a job today is effectively has high as we have experienced this millennium.

For firms it may have felt like pulling teeth to reach this point. We know labor demand increased quickly given strong household incomes and consumer spending. Workers have returned to take advantage of the more-plentiful and better-paying opportunities, although this return was slower than the increase in job openings. But we have now reached the point where employment levels today are essentially back to where they were pre-pandemic. And encouragingly, the labor force participation rate for the prime working-age group has likewise rebounded and is now just a hair below the pre-pandemic peak nationally.

So if these cyclical issues are largely gone, why does a labor shortage remain? This is where the bad news comes in. Besides the strong underlying economy, which is a big part of it, I see a combination of three shifts during the pandemic, and three big structural changes.

In terms of the three pandemic shifts, the first is that self-employment is up. About 20,000 more Oregonians are self-employed today than in the years leading up to the pandemic. Second, there are around 16,000 fewer multiple jobholders today. Both of these trends mean the number of Oregonians with a job is higher than the underlying payroll job counts indicate, which is something we see comparing the household and establishment surveys.

The third pandemic shift has been the increase in the number of workers quitting their jobs. Now, they are not quitting and dropping out of the labor force. Rather they are quitting one job to take another one. Quits in Oregon are up about 5,000 per month. Combined, all three of these factors leave businesses with more job vacancies today even if their desired staffing levels are the same as pre-pandemic.

In terms of the structural factors, the first is the outright decline in foreign-born workers as discussed before. A silver lining here is that in the past handful of months the U.S. numbers have really rebounded. That has yet to show up in the Oregon data, but should in the months ahead. There is a risk here that some of these observed changes — both up and down — in the data are noise from a small sample of a hard-to-reach population. Even so, we know international immigration has slowed considerably even if such outright declines end up being noise.

Second, we cannot ignore the tragic loss of life from the pandemic itself. Oregon has suffered 9,500 more deaths in the past two years than our office was expecting pre-pandemic. This “excess death” type calculation is likely to rise further, and is larger than the 7,500 official COVID-19 deaths to date. Adjusting these deaths by age and labor force participation rates finds that Oregon lost an estimated 2,500 workers during the pandemic. Such a figure is equal to about one month’s worth of job gains in a full employment economy, and unfortunately is a structural factor.

Finally, the biggest reason for a tight labor market today and in the years ahead are demographics. The big Baby Boomer generation is retiring, something our office has been highlighting repeatedly over the years. The new, younger entrants into the labor market are a steady, but not increasing flow due to the declining birth rate in recent decades and slower migration during the pandemic. The bottom line is the labor market is and will continue to be structurally tight for these demographic reasons.

Overall the good news is the cyclical issues we have been worried about are effectively gone. The bad news is we still have an “unsustainably hot” labor market in the words of Federal Reserve Chair Powell. Most of this is now due to structural factors like excess demand, and mediocre demographics. Tighter monetary policy can, and will help with the former, while the latter will only change with broader societal shifts or, say, increased immigration both international and domestic in the case of Oregon.

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Posted by: Josh Lehner | April 27, 2022

Goods Production is Strong

Consumer spending on physical goods remains robust. It accelerated earlier in the pandemic as we still had strong household finances but either couldn’t or didn’t want to spend on services like going out to eat, on vacations, performing elective surgeries, and the like as much as we used to. The increases in spending on physical goods has held up, even as service spending has rebounded. Today, consumer spending on goods is 19% above pre-pandemic trends, and even after adjusting for inflation it remains 8% above trend. Given household finances, the baseline outlook is for more of the same. Should they want to, consumers can afford to maintain their higher goods spending, while also increasing their service spending.

This matters economically because the strong consumer demand for goods is driving a more robust than expected manufacturing recovery. Industrial, and manufacturing production are higher today than at any point since the Great Recession. Our factories, warehouses, and logistics are all producing and moving record volumes of products trying to keep up with the strong consumer demand.

According to the latest Federal Reserve data, U.S. manufacturing production is now 4% above the pre-pandemic peak. Our office takes the U.S. data and reweights it based on our local manufacturing subsector employment trends. That estimate of Oregon manufacturing production is running a bit stronger and is now 5% above pre-pandemic peaks. While this is not an exact measure of Oregon production, what it does tell us is that the industries that Oregon has larger concentrations in are doing better than the industries in which we have smaller concentrations. Our more modern mix of manufacturing is benefiting our overall economic recovery.

And of course, to produce enough products to meet demand, it means business investment and employment need to increase. Unfortunately, from a historical perspective, manufacturing employment doesn’t fully recover from recessions in recent generations. Specifically, in Oregon, manufacturing employment has not fully recovered from a recession since the 1990s. Nationally, US manufacturing employment has not fully recovered from a recession since the 1970s. However, this time may be different. Today, we are pretty close to a full manufacturing employment recovery. Both in Oregon and across the country, manufacturing employment is 1% lower that just prior to the pandemic. Although to be fair, employment is down a bit more from the peaks reached prior to the trade war back in 2018 and 2019, which resulted in some lost jobs leading into the pandemic.

A few additional notes and comments:

It is clear the good news outweighs the bad. That said there are two weak spots in Oregon’s manufacturing recovery: primary metal manufacturing employment is down 25% and transportation equipment is down 13%. Combined, all other subsectors are fully recovered and individually they are all at least close to a full recovery or better.

The overall strength in manufacturing employment is encouraging, if not a bit surprising given that wage growth has lagged. We know that both the career path for manufacturing is good but also that the manufacturing wage premium has been declining. There are a lot of low-wage, and entry-level type positions within the sector. Wages are rising during the pandemic. However these gains, at least for the average worker, have not kept pace with the broader economy. In fact, for the first time in which we have data the average manufacturing wage excluding computer and electronic products* is below the overall average wage in Oregon. Today the manufacturing wage premium is negative.

Wood products is the only manufacturing subsector to see above average wage gains over the past two years. This makes sense in the context that demand for wood products has been very strong during the pandemic. And with higher lumber prices, firms can pay higher wages to attract and retain workers to increase production. All other subsectors have seen wage gains, but near the average or slower.

Finally, in terms of the outlook there are a few important things to consider.

First, the baseline outlook calls for steady spending on goods, and therefore ongoing solid production and employment numbers. That said, the risks are weighted toward the downside. Should sales slow due to inflation causing demand destruction, to the pandemic-induced demand being met and fading away, or to consumers shifting out of goods and back into services, then we would see the local production and employment numbers soften as well. This could be outright declines, or just slower gains moving forward.

Second, current geopolitical events are muddying the picture. The war in Ukraine impacts energy and production costs, in addition to creating some global supply chain issues as it drags on. Similarly, the shutdowns in China will likewise impact global supply chains where the U.S. will see somewhat fewer imports for some period of time. This means fewer consumer products, but also fewer imported manufacturing inputs which could impact domestic production as well. The good news is these are more likely to be temporary disruptions, but disruptions nonetheless.

Bottom Line: The manufacturing recovery continues to outpace expectations. Production and employment are strong, as consumers continue to demand higher volumes of physical goods. This cycle is different. We may see a full manufacturing employment recovery for the first time in decades, or at least get really close. The outlook is not without risks, most of which are weighted toward the downside. In the meantime, expect manufacturing wage growth to pick up in order to attract and retain workers in a tight labor market.

* Due to composition of the computer and electronic products workforce, which is mostly higher paid engineers and white collar professional types, we exclude the wages here to get a better gauge of underlying wages in manufacturing

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Posted by: Josh Lehner | April 19, 2022

Stronger Household Formation in Oregon?

Housing currently faces somewhat contradictory data points. On one hand, housing demand is strong as evidenced by the home sales data and a declining rental vacancy rate. On the other hand, estimates of population growth range from modest at best, slowing more generally, to even small losses, depending upon the region or the data source. Regardless, it is clear there has been no pandemic migration boom in Oregon.

I see three main ways to square these seemingly contradictory data points. First would be the population estimates are too low, or the lagged data has yet to catch up to reality. Second would be the flow of new construction coming on to the market has slowed more than population growth has. Third is an increase in household formation rates among existing residents, which is the most interesting possibility.

We know that household formation rates have declined in recent decades. A small reversal of these trends would boost housing demand more than enough to offset weaker population gains. Such an outcome is possible given the large Millennial cohort is fully aging into their 30s this decade when living with roommates is less common. This can be seen in the chart below of headship rates by age in the Portland region. Headship rates are the share of the population that is a householder (formerly head of household).

There are two important items of note here.

First, headship rates increase significantly in ones 20s and 30s. This is the typical life cycle effect. The increasingly-middle-aged Millennials are right in the heart of these age cohorts. As such, Millennials are now the key demographic and overall driver of the economy. This is the structural, demographic tailwind for housing we have discussed before.

Second, headship rates among 20- and 30-somethings ticked up in recent years. The difference between the light blue and dark blue lines in the chart above may not seem like much at first glance. However it is actually a very substantial change. Among 20-39 years, this increase in just the headship rates is the equivalent to adding about 15,000 to 20,000 more households in the Portland region. That is a huge increase equal to more than a full year’s worth of new housing construction in the metro area. Now, some of this could be in part due to noisy data as the estimates do vary depending upon the exact years of comparison. In particular the 2020 ACS had a low response rate and is based on “experimental estimates” as opposed to official statistics. The good news is we are a handful of months away from the 2021 ACS data being released which will provide another snapshot of headship rates, and one which will be mid-pandemic. The main point here is not to get caught up in the specific calculation but to see how an increase in household formation rates is more than enough to offset slower population gains from a housing market perspective.

A key question is why would household formation rates increase? In the big picture we are probably talking about the same issues researchers were studying pre-pandemic on why household formation was lower. This included worse housing affordability forcing people to live at home longer or with roommates, in addition to things like delayed marriage or having kids, and so on. Changes to these big picture trends tend to be clear in hindsight, after a few years of data confirm any shifts.

So for now we are probably talking more about pandemic-related impacts to household formation. With a deadly, contagious virus going around, people likely wanted more space and to be around fewer people. Recovery rebates, record low mortgage rates, and working from home increased the demand for homeownership. At the same time new rental properties kept coming on the market initially as they were under construction in the years leading up to the pandemic. That meant there were more vacant units to move into. Combining all the above with the underlying demographics and it is not hard to see how household formation could increase in a meaningful way.

Over the longer-term, housing demand will come more from the rebound in migration patterns to Portland and Oregon. Migration is pro-cyclical. People move in search of better opportunities during good economic times. More tangible is the strong, recent rebound in the number of surrendered driver licenses at Oregon DMVs. Housing demand today is strong for structural, demographic reasons and cyclical, migration and economic reasons. That said, with affordability worsening again, will we see household formation slow as well, with fewer single-person households and more roommates out of financial necessity?

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Posted by: Josh Lehner | April 15, 2022

Tax Season 2022 Starts Strong

Happy Friday everyone. Just a friendly reminder, next Monday is the personal income tax filing deadline for tax year 2021. You still have a couple of days to file on time if you need it!

Our office’s baseline expectation for tax season combines three things. First, the tax filing deadline is back to being near April 15th, unlike the past two years where the deadline was delayed. As such, the flow of funds, so to speak, should be normal as well. Second, underlying income growth will be strong given the inflationary economic boom. Third, actual tax collections will be tempered some because we will be giving out a record kicker due to our office under forecasting revenues in the 2019-2021 biennium. Given the kicker is administered as a credit on the return the impact on state revenues is to collect smaller final payments or disburse larger refunds, both of which lower the total payments owed in April.

As of last week, final payments are off to a strong start this tax season. It is still a bit too early to tell where exactly they will end up. Peak processing season for our friends over at the Department of Revenue is just getting underway (at least in terms of dollar volume of returns). We will know more in a couple weeks.

Overall our office expects revenues to be more like 2020 (also a kicker payout year) than 2019 or 2021. The key will be just how strong is underlying income growth, including some non-wage forms of income like capital gains. Stock markets were up about 25% last year. Capital gains are not included in the BEA estimates of current personal income, in part because a key piece is taxpayer behavior. Households can choose when to realize their gains, which can either buck or amplify trends in the underlying asset market valuations. We will know more soon, and particularly after the extension filers are processed later this fall.

Our next forecast is scheduled for Wednesday, May 18th when we will update our overall outlook including the latest revenue collection information.

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Posted by: Josh Lehner | April 13, 2022

Inflationary Economic Boom Continues

The inflationary economic boom continues. Jobs, incomes, and output are all rising quickly. The economy will reach full employment much quicker than following recent recessions. However, this cycle brings different challenges. For instance, the nation’s large urban economies lag due to increased working from home and lack of business travel. Even so, no challenge or risk today is bigger than inflation. The baseline outlook calls for higher interest rates to cool demand, slowing inflation and ensuring a continued economic expansion. Unfortunately, a boom today leading to a bust in a couple of years is not out of the question should high inflation persist.

This week we got two updated pieces of data confirming the inflationary boom.

First, this morning our friends at the Oregon Employment Department released the March employment report. Oregon added 5,600 jobs last month and the unemployment rate fell to 3.8%. Oregon has now regained nearly 90% of it’s lost jobs and remains on track for a full labor market recovery later this year.

The combination of strong job growth and robust wage gains means overall labor income is booming. These wage gains offset the fading impact of federal aid from earlier in the pandemic. With households flush with cash, they have the ability and are showing the willingness to pay higher prices for goods and services. Remember, supply chains are not broken. Rather they are overloaded due to the strong consumer demand.

This brings us to the second piece of data this week: inflation. In March, the U.S. consumer price index rose nearly 15% at an annualized pace. Much of the increase is due to the oil shock, which are never good news but the economy is better able to handle today. In a half snarky comment, I think it is fair to say that we are at peak inflation. Prices won’t increase at double-digit rates moving forward. But there’s no comfort in that comment, as we know inflation is not costless. The latest U.S. research indicates that 80% of workers have seen real wage declines in the past 6 and 12 month period.

The real challenge is the blue part of the chart above. We know there are some constraints and issues in the economy. The prices of automobiles, hotels, and the recent surge in food and energy prices are all driving headline inflation higher. However, even when we strip those out (gray portions) we are left with an underlying trend in inflation that has accelerated in 2021 and is now running about 4-5% at an annual basis.

Inflation is likely to remain above the Fed’s target this year and into next, but on a slowing trajectory. As supply chains improve and demand cools, the sharp increases in durable goods prices are likely to reverse somewhat. Headline inflation will also slow as the oil shock from the war in Ukraine fades. However, the key items to watch are to what extent service inflation accelerates and offsets the goods declines, and whether wage growth slows from its brisk pace. The interaction between actual inflation, inflation expectations, and income or wage growth all matter here. Right now they are all pointing toward something faster than what we experienced last cycle.

As such, the Federal Reserve is raising interest rates faster, and higher than they previously anticipated. The good news is the economy can withstand higher rates. In fact, the Fed estimates the neutral rate of interest – where policy is neither stimulating nor restricting the economy – is about 2.5%. The federal funds rate today is the range from 0.25-0.5%. Expectations are the Fed will raise rates to close to neutral this year and monitor the impacts. The real question is whether the economy needs restrictive policy to truly slow inflation. The risk is recessions tend to happen after policy becomes restrictive.

But for now, the near-term outlook continues to be bright. A full labor market recovery is just a few months away. Household incomes are rising quickly. Consumer spending on goods is still 19% (!) above pre-pandemic trends, and service spending is nearly fully recovered. The underlying economic risks here are such that goods spending may revert to trend, leading to a manufacturing recession but not an overall recession, and that service spending accelerates further increasing pressure on the labor market (services are labor-intensive) and inflation overall.

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Posted by: Josh Lehner | April 8, 2022

Trailing Spouses in Oregon (Graph of the Week)

Trailing spouses are those who follow their partner to another city for work. This is a key topic that comes up frequently when our office speaks to regional audiences. In particular we have discussed this on the coast and in the gorge with business groups and local economic development folks. The basic premise is a family relocates for a job opportunity, typically for the husband, and then the local labor market maybe doesn’t have the same opportunities for the spouse, typically the wife. Generally speaking, the wife sacrifices her career for the advancement of her husband’s.

This week I came across a fantastic paper from Professor Janna E Johnson from the University of Minnesota. Paper here, slides here. Professor Johnson’s research brings together the impact of occupational licensing, how that results in less interstate migration, and then how it impacts trailing spouses. All three of these topics individually are vital, and bringing them together makes for a fascinating paper, to say nothing of how she layers on controls for educational attainment, race and ethnicity, different types of occupations and licenses, having kids and so on.

Bottom line: Migration is lower if the husband holds the license compared to if the wife does, implying husband’s status is a more important factor in determining location. Labor market impacts are greater for women than men. Wives are more likely to leave the labor force or switch out of their licensed occupation, while similarly licensed husbands are largely unaffected. Some of this is driven by women’s tendency to enter occupations with higher re-licensure costs, and some of the migration decisions appear to be timed with life events like having a child, which impacts labor force participation.

Professor Johnson’s paper is interesting and on-topic. It helps answer empirically a lot of the questions asked about these issues. With that inspiration I turned to the same data set she uses in the paper and tried to find some local impacts. Keep in mind these are small sample sizes and I am looking for casual inference and not the full-fledged model Professor Johnson uses. Even so, the Oregon impacts are broadly consistent, as seen below in the latest Graph of the Week.

What this chart shows is the change in employment rates among working-age married couples, where both spouses worked the year before. The bars in the chart are the changes in employment rates relative to the working-age married couples who did not move. As you can see, employment is lower for movers than non-movers. This is to be expected. However, in keeping with Professor Johnson’s findings wives have noticeably larger declines in employment than do husbands. This is particularly true for longer distanced moves.

When it came to our office’s conversations on the coast and in the gorge, part of the discussion was for families relocating from larger communities to smaller ones. This does tend to limit the total number of job opportunities, which may be particularly challenging for the trailing spouse, especially if she holds an occupational license that needs to be re-licensed in a different state.

My first thought is about working from home in a pre-pandemic sense. When people vote with their feet to live in your community, but they don’t find a local job that meets their criteria, they tend to either bring a job with them to work remotely, or they start their own business, increasing local entrepreneurship along the way. The less good outcomes would be having to switch careers to have a job, or dropping out of the labor force entirely.

My second thought is thinking about working from home in a pandemic or post-pandemic sense. With remote work becoming more common, maybe some of these dynamics of trailing spouses will be less challenging for households. However this would only apply to the one-third of occupations that can be done remotely. The vast majority of workers need to be at a physical location to build homes, cook food, or give care. Plus, as Professor Johnson notes in her paper, it’s not always just the actual re-licensing costs, but also the impact of losing your network of clients you build up prior to your move like those working in, say, cosmetology or real estate face.

Overall this is a lot of food for thought on important socio-economic topics. Happy Friday everyone.

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Posted by: Josh Lehner | April 5, 2022

International Migration Impacts Oregon’s Labor Market

International migration is one piece of the labor force puzzle. Now, Oregon is not a major port of entry into the U.S. unlike the Californias, Floridas, and New Yorks of the world. However, foreign-born households do find their way to Oregon just like US-born households do. Oregon’s share of the population that is foreign-born (9.8%) is a bit below the national average (13.5%) but ranks 18th highest among all states and DC (2020 ACS 5 year estimates).

The issue is net international migration is at the lowest level in decades according to the latest Census estimates. The pandemic obviously didn’t help, but international migration to the U.S. peaked in 2016 and slowed noticeably in the late 2010s.

In terms of direct labor implications, the number of prime-age, foreign-born Americans and Oregonians hasn’t just slowed, but has declined outright. In Oregon, from 2016 to today, there are 90,000 fewer prime-age, foreign-born individuals. Keep in mind this is a noisy data series and we don’t want to make a mountain out of a mole hill. However, relative to the underlying trend, there are now 68,000 fewer such Oregonians.

Prime-age, foreign-born Oregonians have a labor force participation rate in the 80-82% range depending upon the year. The 68,000 below trend figure directly translates into 55,000 fewer available workers in the local economy. With around 100,000 job vacancies today in Oregon, it sure seems like businesses could use more labor to adequately staff and grow their operations.

In terms of which sectors of the economy are impacted the most, let’s turn to the 2019 ACS data. This provides a pre-pandemic snapshot of the labor force.

Overall, every single industry has foreign-born workers. No industry is likely immune to the slowdown in international migration or outright decline in available workers. That said, goods producing industries like natural resources (crop production), construction, and manufacturing have above-average shares. Also, larger shares are seen in the leisure and hospitality industry, and in addition the parts of professional and business services that include janitorial, landscaping, and waste management.

On one hand, the decline in foreign-born workers is mathematically large enough to basically fully explain the tight labor market. However we know it’s never so simple to just isolate and pull out a small piece of a big network. The labor market is still rebounding from the pandemic, and participation rates are picking up. Migration flows are likewise returning, helping to boost the available number of workers. But it is clear nationally and here in Oregon that international migration, and foreign-born workers are a piece to the puzzle. This is particularly true now that the labor market is structurally tight for demographic reasons as the birth rate declines and the large Baby Boomer cohort continues to retire.

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Posted by: Josh Lehner | March 30, 2022

Shifting Labor Market Dynamics

For much of the past two years the major labor market story has been the rebound in the hard-hit, low-wage industries and the strong wage gains seen or needed to do so. Today, low-wage sectors in Oregon still have the largest jobs hole left to fill, but the relative gap with the rest of the economy is much narrower. Strong recent job gains plus upward revisions during the recent round of benchmarking to sectors like retail, and leisure and hospitality means a full recovery is nearly here.

However, as the overall structure of the labor market approaches normal, or at least a new normal that has some structural changes, different drivers and patterns of growth will emerge. The underlying labor market dynamics are shifting in important ways. Specifically, some of the dynamics seen in low-wage industries thus far — namely rising wages but also higher quits rates — are spreading up the ladder into middle- and high-wage industries. Additionally, as low-wage industries regain their employment levels, it means the composition of job gains in the years ahead will be better balanced across sectors, although every sector today is at a different point in recovery/expansion process.

Now, with inflation running hot only the lowest-paid 20% of workers have seen wage gains faster than inflation in the past 6 or 12 months. That means 80% of the workforce are seeing real wage declines. That is, their wages are rising but at a slower pace than inflation. As such, stronger wage gains are beginning to move up the ladder. See the “wage level” breakdown on the Atlanta Fed’s wage growth tracker for more.

A big question here is what are the macroeconomic implications of faster wage growth among higher-paying jobs? One thing is that the purchasing power of a high-wage job is much greater than a low-wage job. A modest wage gain for an accountant or doctor creates more spending power than does a huge wage gain for a fast food worker. As such, as stronger wage growth moves up the distribution, it creates larger and larger dollar increases in total wages earned by the workforce. This is true even as some of the pandemic dynamics lessen as wage growth moderates among the hard-hit sectors and labor supply improves some. You can see this in the chart below.

What this analysis does is take the U.S. labor market and line it up from lowest- to highest-paying industry at the 3- and 4-digit NAICS level, and then creates quartiles of employment (groups of 25% of the total). We then look at the increase in aggregate wages (combined change in employment, hours, and hourly wages) over the past 6 months and compare that to the prior 6 months. You can see the strong, but decelerating impact of gains among the lowest-paid sectors. More evident is the acceleration up the wage scale. Note that the big increase in the second quartile is almost entirely due to employment services (temporary help). Even so, the dollar amount of the aggregate weekly wage increase among the top two quartiles is twice that the changes seen among the bottom two quartiles. Incomes are rising, and the dollar increases are strongest at the top.

These overall shifts in the labor market are important. The economy is moving from recovery to expansion. However some of the pandemic dynamics are not going away. To the extent that wage gains continue to move up the distribution it will boost household incomes by a larger dollar amount, even if the percentages remain strongest at the lower end. Stronger household incomes better support consumer spending, and therefore a continued ability to absorb higher prices. As Fed Chair Powell recently noted (HT: Tim Duy), supply-side healing is likely to come but at some uncertain date in the future. He goes on to say “as we set policy, we will be looking to actual progress on these issues [inflation] and not assuming significant near-term supply-side relief.” In other words, the Fed is raising interest rates to cool the economy and inflation and cannot assume inflation will slow on its own. A key part of that story is strong household finances which look likely to continue.

Finally, as an aside: Our office has done a few public sector presentations recently and one item we highlight is how public sector wages have lagged private sector gains during the pandemic. Some of that may be a slower response in part due to the composition of the workforce, and some may be due to collectively bargained wages that are locked into contracts. Regardless, it is likely public sector wages will rise faster in the year(s) ahead than they have in the past two. This is likely true now that the state and local government quits rate is rising, creating the same type of dynamics experienced by the private sector.

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